Governance practices among_microfinance_institutions_in_india_micro_save

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June 2015

Governance Practices Among Microfinance Institutions in India


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Corporate governance remains a key risk for the sector

*Source: Microfinance Banana Skins Report 2014

• Ranks among the top five risks faced by MFIs globally*

• Absence of good governance is a recipe for crisis

• Prudent governance practice is at the centre-stage to rebuilding the lost ground

• In India, the risk perception due to governance has reduced


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Analyse current scenario, identify gaps, and recommend actions

Evaluate involvement of board in the functioning of the institution and adoption of responsible finance practices

Scan corporate governance models adopted by MFIs in India

Objective 1

Objective 2

Objective 3

In light of the above, the study has three key objectives


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Approach and Methodology

Key Findings

The Way Forward

1

2

3

In line with the objectives, the presentation flow is…


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Approach and

Methodology


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Adopted a mix of primary and secondary research

• Desk research to understand prevailing issues and design research tools

• Primary survey with MFIs to scan their corporate governance practices

• Interview with stakeholders to understand their perspective

• Analytical framework to assess MFIs’ adoption of prudent governance practices


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5%

71%

12%

12%

Distribution by Legal Entity

Cooperative

NBFC-MFI

Sec.25Company

Society/Trust

10%

24%

5%

24%

24%

14%

Distribution by Location of HQ

Central

East

North East

North

South

West

38%

36%

26%

Distribution by Outreach

Tier 3(<50,000)

Tier 2(50,000-250,000)

Tier 1(>250,000)

60 MFIs were identified for secondary research


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4%

83%

8%4%

Distribution by Legal Entity

Co-operative

NBFC-MFI

Sec.25Company

Society/Trust

8%

17%

8%

25%

29%

13%

Distribution by Location of HQ

Central

East

North East

North

South

West

21%

42%

38%

Distribution by Outreach

Tier 3(<50,000)

Tier 2(50,000-250,000)

Tier 1(>250,000)

24 MFIs identified for on-site review


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The 4 pillars of analysis

1 2 3 4

• Size of the board

• Qualification, skills of board members

• Relation between chairperson and CEO

• Gender diversity

• Constitution of sub-committees

Board composition and structure


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1 2 3 4

• Selection and appointment of board members

• Frequency of board meetings

• Attendance in board meetings

• Subject matters addressed in meeting agenda

• Conduct of sub-committee meetings

Board administration and procedure


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1 2 3 4

• Contribution in defining strategy

• Performance evaluation of CEO

• Performance evaluation of board

• Contribution in fund raising

• Availability of board members others than board meetings

Board commitment to roles and responsibilities


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1 2 3 4

• Compliance to code of conduct and fair practice code

• Transparency and responsible pricing

• Monitoring client protection initiatives

• Preventing mission drift

• Performance evaluation of CEO/SMT on social parameters

Governance and responsible finance


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Salient points about the analysis framework

• A three-point scale used to grade MFIs – low, acceptable and high

Below regulatory requirement or industry norms

Compliance with existing regulations or norms

World-class practices beyond existing norms

Low

Acceptable

High

• Only MFIs visited for on-site assessment were graded

• Norms selected for grading were universal, irrespective of the legal entity of the MFI


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Key Findings


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Focus is on increasing board size to accommodate varied skills

1 2 3 4

8%

75%

17%

Low Acceptable High

Board composition and structure


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What board size is the most appropriate?

Are key skills represented?

84%

60%

56%

52%

36%

36%

20%

16%

12%

Banking

Accounts and Finance

Private Equity and investment

Welfare and Development

Risk Management

Social Performance

Legal

Insurance

Human Resource

Experience Profile of MFI Boards

Legal

Human Resource

TechnologyM

issing

Sk

ills


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Is there an appropriate mix of directorship?

61%

MFIs with one-third Independent Directors


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Is there an appropriate mix of directorship?

Are women represented?

78%

MFIs with Women Directors


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Independent directors remain elusive

• 24% of MFIs have majority independent directors

• Independent directors with required skill set are difficult to find

• Composition and structure of sub-committee suffers

“Independent directors have

a larger role to play. While

investor directors only

protect their interests, the

independent directors have to

ensure equitable justice to all

stakeholders (employees,

clients, vendors, etc.).

Independent directors

therefore have to play a

much larger role”

An Independent Director


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Mandatory sub-committee structure is in place

• Structure in compliance with RBI and CA 2013 requirements

83%

68%

54%

39%

39%

34%

32%

24%

17%

Audit and Finance

Risk Management

Nomination and Remuneration

Asset and Liability Management

Executive

Corporate Social Responsibility

Human Resource

Governance

Social Performance Management

Board Sub-Committees


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Fair degree of formalisation of key procedures

1 2 3 4

Board administration and procedures 4%

88%

8%

Low Acceptable High


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Selection and appointment procedures are being formalised

• 61% MFIs have a documented procedure

• Code of Conduct for board members exists in 75% MFIs

• Not much say in the appointment of nominee directors


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MFIs pay only a fixed sitting fee to directors

• 73% pay fixed sitting fee

• 22% do not pay any fee at all

• Only 2 MFIs pay profit-linked compensation to independent directors


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Board meeting procedures are fairly standardised

• 95% MFIs have quarterly board meetings

• The duration of the meeting is generally less than a day

• 93% MFIs had more than 75% attendance

• 76% MFIs have prescribed minimum number of board meeting to attend


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Formalisation of sub-committee procedures desires improvement

• Adequate time is not available for sub-committee meetings

• Agenda of sub-committee meetings is generally not well documented

• Sub-committees do not present any report to the board

• Often the sub-committee chairperson summarises the discussion


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Boards are trying to be more vigilant post AP crisis

1 2 3 4

Board commitment to roles and responsibilities

0%

88%

13%

Low Acceptable High


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“Although the board has

improved in both quantitative

and qualitative terms, the

‘texture’ of the board can

determine the effectiveness of

the board. The texture is a

function of two factors:

1) Type of board members; and

2) Their level of commitment.

The higher the commitment, the

stronger the governance”

– A Sector Expert


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Management often goes to the board for support

• Board members are available for support and guidance even in-between board meetings

• Some MFIs expect support from board members to raise capital

• Tier-2 and tier-3 MFIs need more active support from board

Strategic direction and advisory

Lobbying and advocacy

Technical insights and capacity building

1

2

3

Areas of support


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Capacity development is hardly a priority for MFIs

• Boards have hardly undergone performance evaluation of their own

• Perception among some MFIs that there is no need for capacity development

• Focus on compliance with regulatory prescriptions


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Understanding of social performance is restricted to compliance

• Boards have hardly undergone performance evaluation of their own

• Capacity building of the board members is not in the radar

• Focus on compliance with regulatory prescriptions

• SPM is still being followed to please external stakeholders

• Lack of relevant skills and inadequate capacity development of the board on SPM

• A lot of boards still equate SPM with CSR


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Boards are more focused on compliance

1 2 3 4

Governance and responsible finance

0%

96%

4%

Low Acceptable High


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Boards ensure compliance with statutory requirements

A very high proportion of MFIs have adopted board approved policies on key issues

Board Approved

Key Policies

Conflict of interest

Responsible pricing and transparency

Grievance redressal

1

2

3

Loan application, appraisal and disbursement4

Fair Practice Code5


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Some efforts are being made to internalise responsible finance

80%

MFIs that discuss RF Initiatives in Board Meeting

RF features regularly in board discussions


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Developed mechanism to ensure commitment to return targets

Some of the ways in which

MFIs achieve this are:

A. Capping the RoA/RoE

targets

B. Allocating proportion of

profit for development

activities

C. Diversifying shareholding

structure


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Developed mechanism to ensure commitment to return targets

Integration of social parameters in performance evaluation of CEOs

Sample Evaluation

Parameters for CEO/MD:

A. Growth of outreach to BPL

households and financial

services to them;

B. Institutional efficiency and

financial sustainability;

C. Social impact, client protection

and satisfaction;

D. Leadership.


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The Way Forward


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Management Industry

AssociationsInvestors and

LendersBoard of Directors

1

Share operational and financial reports regularly with the board2

Develop Code of Conduct and ToR for the board members

3

Adequately compensate board members for their time 4

Aim to have a diversified shareholding

Conduct periodic evaluation of the board 5


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Management Industry



1 Ensure Chairperson is an independent director

2 Exhibit forthrightness and independence of mind

3

Find time to review reports and share feedback 4

Increase engagement through interactions beyond meetings

Ensure adoption of services of credit bureaux5


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Management Industry



1 Assess governance as part of due diligence

2 Cap the number of MFIs where a nominee can represent

3 Build capacity of nominees and evaluate their performance

4 Identify skill gaps and nominate directors accordingly


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Management Industry



1 Draft a generic corporate governance guideline for MFIs

2 Maintain database of independent directors for MFIs

3 Conduct sensitisation programme for directors


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Governance practices among_microfinance_institutions_in_india_micro_save

Economy & Finance

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